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Sunday, October 05, 2008

What restrains authoritarianism 2.0

Authoritarianism 2.0 is the mixture of a degree of economic freedom without political freedom that is in force in parts of Latin America, Russia, the Middle East, and China. The new conventional wisdom is that Milton Friedman was wrong, that capitalism does not generate a lot of pressure in favour of movement towards democracy. Russia, China, UAE, etc. have found the recipe to harness globalisation and free markets for obtaining high growth, but at the same time not permitting freedom. This is an important phenomenon that merits exploration. More importantly, it poses a challenge to prosperity and freedom in the world today.

In China, one sees the phenomenon of urban intelligensia - who should have ordinarily been a fertile ground for subversive ideas - being quite comfortable with the deal that the State offers them, and settling into the roles of consumers, workers and entrepreneurs without hankering for the role of citizens. In this case, the domestic channel through which capitalism can help induce freedom is blunted.

I feel that while this domestic channel is weaker than expected, an external channel does operate. Authoritarianism 2.0 does involve embracing globalisation, of engaging with trade and capital flows with the world. As an example, Russia and all the autocracies of the Middle East have full capital account convertibility, and China has a very large current account. This induces some checks and balances. Consider the Russian stock market index:

The recent experience with Russia is interesting. In recent months, considerable economic pain has come about, as a consequence of decisions of the State. This suggests that there are external economic constraints upon Authoritarianism 2.0. See this excellent article by Charles Clover and Catherine Belton in the FT. The key events in tracing the loss of confidence on the part of private capital seem to be as follows. (I'm quoting from this article):

Late May

"BPs 50 per cent stake in the TNK-BP oil venture, came under pressure from Russian shareholders and the government seemed powerless or unwilling to intervene. As the dispute escalated Robert Dudley, the BP-backed chief executive, left the country in July blaming official harassment."

The same day

"At a meeting of metals industry chieftains in Siberia, Mr Putin lashed out at Igor Zyuzin, the owner of Mechel, the Russian steel and coal producer, for price-gouging. With trademark gallows humour, he threatened to send a doctor to cure Mr Zyuzin, who was absent from the meeting claiming illness. Markets sank and half the value of Mechel, which is listed on the New York Stock Exchange, was erased amid fears that the company was finished."

After that

"Then the anti-monopoly service began to investigate other big metals companies for price-gouging as part of a battle to fight rampant inflation, later extending the probe to price fixing in fertilisers and cement. Investors began to fear the government could start imposing price caps on some of Russias biggest blue chips, limiting their earnings capacity."

6 August

War in Georgia. "Fear of a capricious and arbitrary Kremlin put flight to foreign investors, with analysts estimating that $21bn left the country in the weeks that followed Russias military intervention. Adding to the pressure was the weakness in global stock markets and the falling price of oil, on which Russia is dependent for its fiscal health."

These events give us a useful framework to think about the evolution of stock prices in Russia. Stock prices are down to the levels of 2006. Some of this is owing to global events, that have impacted upon all emerging markets. As a control, consider India.

This is an unfair comparison because Russia is an oil exporter while India is an oil importer. This suggests that roughly speaking, the Russian stock market has suffered a 20-30% loss over and above that suffered by India.

If Putin had chosen to not engage in global economic integration, he would have had the autonomy to pursue political actions much like Stalin did under Authoritarianism 1.0: there would have been essentially no checks and balances. But under Authoritarianism 2.0, he does face external constraints.

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